Earnings Call Transcript - TRST Q3 2024

Operator, Operator

Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. All participants will be in listen-only mode. Before proceeding, we would like to mention that this presentation may include forward-looking information about TrustCo Bank Corp New York, that is intended to be covered by our safe harbor for looking-forward statements provided by the Private Securities Litigation Reform Act of 1995. Actual results, performance or achievements could differ materially from those expressed in or implied by such statements due to various risks, uncertainties and other factors. More detailed information about these other risks and factors can be found in our press release that preceded this call and in our Risk Factors and Forward-Looking Statements section of our annual report on Form 10-K and updated on our quarterly reports on Form 10-Q. The forward-looking statements made in this call are valid only as of the date hereof and the company disclaims any obligation to update this information to reflect events or developments after the date of this call, except as may be applicable by law. During today's call, we will discuss certain financial measures derived by our financial statements that are not determined in accordance with the U.S. GAAP. The reconciliations of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab of our website at trustcobank.com. Please note also that today's event is being recorded and a replay of this call will be available for 30 days and audio webcast will be available for one year, as described in our earnings press release. At this time, I would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President and CEO. Please go ahead.

Robert J. McCormick, President and CEO

Thank you, and good morning, everyone, and thank you for joining the call. As the host said, I'm Rob McCormick, the President of TrustCo Bank. I'm joined today, as usual, by Mike Ozimek, our CFO, who will provide details on the numbers, and Kevin Curley, who will offer insights on lending. On behalf of the entire TrustCo Bank family, I would like to express thanks for the many expressions of concern and well wishes as Hurricane Milton tore its way across our geographic footprint in Florida. We are happy to report that our people came through the storm in good shape, although a little worse for wear. Likewise, our facilities withstood the battering, with many opening within a day or so of the storm, and all locations are now open. Our results this quarter are akin to a baseball team that reliably hits singles and doubles. There's no grand slam or even a home run, but at the end of the day, we scored runs and posted a win. Solid plays we executed included holding the line on the cost of deposits, originating new loans at better interest rates and controlling expenses over the year. We grew our deposits from the third quarter of last year. This was achieved in part by capitalizing on our strong customer relationships that enabled us to direct some core deposit outflow that favorably priced CDs, and we primarily grew demand deposits. With that said, we're happy to report an increase in our net interest margin over the quarter. Market conditions continue to drive customers to home equity products, and we realized a 6% increase to that portfolio over the quarter, adding to growth of 18% over the year. The new volume was booked at slightly higher rates. These factors combined to increase our margin over the quarter. We also saw total loans reach another all-time high at nearly $5.1 billion, which is a win in itself and also highlights the symmetry that we are so proud of between our deposit portfolio and our loan portfolio. We gather deposits in our areas of operation and lend those same funds right back into those communities. Credit quality is on the minds of many investors and analysts, and ours remains stellar. As it has been over a long period of time, non-performing loans to total loans held steady at 0.38% over the quarter. This speaks to our high underwriting standards and the diligent and effective efforts of our loan processing operations. The most important number we posted was a commendable $12.9 million of net income. Now, Mike will delve into the numbers, and Kevin will provide an update on the loan portfolio, and then we can take your questions if you have any.

Mike Ozimek, CFO

Thank you, Rob, and good morning, everyone. I'll now review TrustCo's financial results for the third quarter of 2024. As we noted in the press release, the company saw third quarter net income of $12.9 million, an increase of 2.6% over the prior quarter, which yielded a return on average assets and average equity of 0.84% and 7.74%, respectively. Capital remains strong. The consolidated equity to assets ratio was 10.95% for the third quarter of 2024 compared to 10.31% in the third quarter of 2023. Book value per share at September 30, 2024, was $35.19, up 7.3% compared to $32.80 a year earlier. Average loans for the third quarter of 2024 grew 2.6% or $127 million to $5 billion from the third quarter of 2023, an all-time high. Overall, loan growth has continued to increase, with the residential real estate portfolio leading the charge, increasing by $50.4 million or 1.2% in the third quarter of '24 over the same period in '23. Home equity lines of credit increased by $60 million or 18.7%. Average commercial loans increased by $18.1 million or 6.9%, while installment loans decreased by $1.5 million or 9.5% over the same period in '23. For the third quarter of '24, the provision for credit losses was $500,000. Retaining deposits has been a key focus throughout 2024. Total deposits ended the quarter at $5.3 billion. As we move forward, our objective is to continue to offer competitive product offerings of the bank through aggressive marketing and product differentiation. Net interest income was $38.7 million for the third quarter of '24, an increase of $883,000 or 2.3% compared to the prior quarter. The net interest margin for the third quarter of '24 was 2.61%, up 8 basis points from the second quarter of '24, resulting in two consecutive quarters of an increase in net interest margin. Yield on interest-earning assets increased to 4.11%, up 5 basis points from 4.06% in the second quarter of '24. The cost of interest-bearing liabilities decreased to 1.94% in the third quarter of '24 from 1.97% in the second quarter of '24. Throughout 2024, we have been able to lower the rates offered on time deposits while continuing to retain a significant portion of the product quarter-over-quarter, which will continue to bring down the cost of time deposits. The bank has seen erosion of margins begin to turn around last quarter, and we are optimistic going forward. Our Wealth Management division continues to be a significant recurring source of noninterest income. They had approximately $1.3 billion of assets under management as of September 30, '24. Now, moving to noninterest expense. Total noninterest expense, net of ORE expense, came in at $26 million, down $447,000 from the prior quarter. The decrease is the result of lower costs and salaries and benefits, net occupancy, equipment expense, outsourced service, and advertising expense, partially offset by the increase in professional services and FDIC and other insurance during the quarter. ORE expense, net, came in at an expense of $204,000 for the quarter as compared to $16,000 in the prior quarter. Given the continued low level of ORE expenses, we are going to continue to hold the anticipated level of expenses to not exceed $250,000 per quarter. All other categories of noninterest expense were in line with our expectations for the third quarter. We'd expect '24's total recurring noninterest expense, net of ORE expense, to be in the range of $26.9 million to $27.4 million for the quarter. Now, Kevin will review the loan portfolio and nonperforming loans.

Kevin Curley, Lending Officer

Thanks, Mike, and good morning to everyone. Average loans grew by $127 million or 2.6% year-over-year. The growth was centered on residential mortgages, which increased by $40 million over last year, and our home equity loans also increased by $61 million or 18.4%. In addition, our commercial loans grew by $12 million year-over-year. For the third quarter, actual loans increased by $33 million. Residential loans increased by $35 million, with both first mortgages and home equity credit lines posting increases. Commercial loans and installment loans were slightly lower for the quarter. We remain well-positioned in the market and seek to capitalize as market activity develops. Our portfolio of products, combined with the flexibility to control pricing and our ability to offer various promotions, puts us in a great position. We have been keeping our rates very competitive with the goal of increasing volume. Rates in the market have increased in recent weeks, and our current rate is 6.25% for our base 30-year fixed-rate loan. Additionally, we have very competitive adjustable-rate mortgages with rates below 6%. Our home equity products continue to see steady demand as they remain attractive to many borrowers who may have low-rate mortgages and may also want to use their home's equity for various projects or large purchases. Overall, we are pleased with the loan growth in the quarter and remain focused on driving stronger results. Now moving to asset quality. Asset quality at the bank remains strong. Nonperforming loans were $19.4 million at quarter-end, $19.2 million last quarter, and just under $18 million a year ago. Nonperforming loans now stand at 0.38% of total loans compared to 0.38% last quarter and 0.36% a year ago. Nonperforming assets totaled $21.9 million as of September 30, versus $21.5 million last quarter and $19.1 million a year ago. Our early-stage delinquencies also continued to be steady and charge-offs for the quarter amounted to $222,000, with a year-to-date total of only $128,000. At quarter-end, our allowance for loan losses was a solid $50 million with a coverage ratio of 257% compared to $47.2 million and a coverage ratio of 264% in September of 2023.

Robert J. McCormick, President and CEO

That's our story. We're happy to answer any questions you might have.

Operator, Operator

Thank you very much. Our first question comes from Ian Lapey of Gabelli Funds. Ian, your line is now open.

Ian Lapey, Analyst

Hi. Good morning, Rob and team.

Robert J. McCormick, President and CEO

Good morning, Ian.

Ian Lapey, Analyst

Congrats on a good quarter. Yeah, a few questions. I guess, first on the hurricanes. Good to hear the people and your properties are okay. Any thoughts about credit issues that might result from damage to maybe some of the homes that you have mortgage...

Robert J. McCormick, President and CEO

We've gone through several of these storms, but we haven't experienced those kinds of issues before. For individuals who have faced losses, we set up reserve accounts at the bank and distribute those funds as they complete repairs on their homes. However, we are not observing much of that this time, so it appears it won't significantly impact us overall.

Ian Lapey, Analyst

Okay. Good. On the CDs, can you just review sort of what the pricing is for maturing CDs compared to new CDs that you are issuing now?

Robert J. McCormick, President and CEO

Most of our customers like the three months, believe it or not, right now, Ian. So, most of the customers at maturity are going into a three-month rate. We are offering a pretty attractive 12-month breakthrough, but it's about a 60-40 split right now between people taking the three-month and the 12-months.

Ian Lapey, Analyst

And how much are you saving when you have one maturing and versus showing a new one?

Robert J. McCormick, President and CEO

The rate for three months is in the 4.5% range, and the rate for 12 months is in the 4% range.

Ian Lapey, Analyst

Okay. And then, on the Financial Services, really strong quarter, and you mentioned $1.3 billion in AUM. Was the increase in revenues from Financial Services, was that driven by higher AUM, or was there anything unusual in the quarter?

Robert J. McCormick, President and CEO

Assets under management are up year-over-year, and we are proactive with regard to our fees. So, the combination of the two has had a very positive effect in Financial Services or in Trust. And I got to tell you, Ian, Pat LaPorta runs that unit for us, and Pat and Kevin have assembled a very strong team in the Trust department or the Financial Services area. They're doing a lot of seminars and a lot of customer contact, and I hope it continues. I really do, because they're on a very good trend right now.

Ian Lapey, Analyst

Okay. Great. And then for my last question, I believe the capital position is the strongest among any bank I follow. With your net interest margin now starting to improve, what are your thoughts on capital? How do you prioritize growth? I noticed your branches have decreased year-over-year. Are you considering adding branches or increasing dividends or share repurchases with the stock trading below tangible book value? Could you elaborate on how you're approaching those options?

Robert J. McCormick, President and CEO

As we see that light at the end of the tunnel and it gets brighter over time, we're certainly going to look at all of those things. We are advocates and fans of a share buyback program, and there are a couple of areas generally that we're looking at for possible new branch expansion. So, those would be probably the two biggest priorities that we would have.

Ian Lapey, Analyst

Okay.

Robert J. McCormick, President and CEO

Just trying to keep our powder dry through this period of time. Okay, that's great.

Ian Lapey, Analyst

Okay. Congrats.

Robert J. McCormick, President and CEO

All right, Ian.

Operator, Operator

Thank you very much, Ian. We currently have no further questions. So, I'd like to hand back to Robert J. McCormick for any closing remarks.

Robert J. McCormick, President and CEO

Thank you for your interest in our company. I hope you have a great day. Thank you.

Operator, Operator

As we conclude today's call, thank you to everyone for joining. You may now disconnect your lines.